When fall in term deposit not bad

Dhaka,  Sun,  24 September 2017
Published : 23 Aug 2017, 19:57:25

When fall in term deposit not bad

Abu Ahmed
Many banks in the world do not receive any term deposit. In many economies, the interest rate is either zero or near zero and in those economies, the question of paying any interest to the depositors with banks does not arise. In fact, most people do not keep their money with banks for earning interest. They, however, keep the money for temporary periods for security reason and for facilitating transactions. 

In Bangladesh, there are three types of deposits with banks, the most popular one being term deposit which is popularly known as fixed deposit. The other two are savings and current deposits. Why is term deposit so much popular with depositors? Because, they can receive interest from it and in many cases, they earn good money from bank interests. Traditionally, banks in Bangladesh had been offering good interest to depositors and whenever the rates of interest on term deposits go down, they feel its pinch. 

Reduction of interest on term deposits by banks has become very unpopular with depositors in Bangladesh. Many even argue that any reduction in interest rates will lead to a deep cut in savings. Many want to argue that if savings with banks go down, the economy will ultimately suffer as it would lead to low investment. But such assertions and arguments have little economic reasoning. Ultimately when term deposits in banks drop, the same money finds its ways to other deposits in savings and current accounts. Money goes out of the banking channel temporarily but again comes back to banks, may be not as term deposits but as deposits in savings and current accounts. 

Recently, it was reported in the media that for the year that ended in December 2016, the banks lost 4.0 percentage points in term deposits which is the highest percentage loss in a few years. But as per media report, the term deposit still accounts for 53.6 per cent of all deposits which, this writer believes, is higher in Bangladesh when compared to parallel economies of the world. A high percentage of term deposit brings more burden to the banks as they are to pay interests against it. The Bangladesh economy experienced a period of high interest rates in the last few years which was the main reason for having so much of term deposits with banks. 

Now, when banks are offering lower and lower interest rates, the decline in the term deposit has become inevitable. Where is the money from term deposits flowing to? It is certainly either to the banks' savings or current accounts or to the non-banking financial institutions (NBFIs) which offer relatively higher interest rate. The more plausible explanation of the phenomenon surrounding the decline in term deposits with banks is that a percentage of money is going to the NBFIs and another part may be going to equity market and for other previously postponed expenditures like buying a car or a flat.

In any way, the spent money is bound to come back to financial intermediaries, including banks, unless people's cash-deposit holding changes. This can also be judged from the total deposits with financial intermediaries, which did not go down at all. Unless the Bangladesh Bank puts a hold on the orderly supply of high-powered money, there is the least likelihood of a decline in total deposit. Even if the Bangladesh Bank decides to put a complete hold on increase of high-powered money, the total deposit will not go down unless the value of the money multiplier goes down. 

Only in a declining economy, the value of money multiplier, other things remaining the same, goes down. In an economy growing at 6.0-7.0 per cent annually like that of Bangladesh, the intensity of money use will go up and with that it is expected that value of the money multiplier will also rise. The value of money multiplier is important in the sense that it acts as the multiplying factor in constituting the total money supply in the economy. The decline in term deposits means only a reshuffling of depositors' decisions with regard to money holding. If the depositors' decision goes for equity purchase, it is good for the economy. 

Yes, the decline in the term deposit will impede banks' capacity for offering long-term lending for business. But this should not be banks' prime function in their cash management. Banks should go for more short-term lending as in other countries. In Bangladesh, banks should come out from the paradigm of term lending against high interest rate as a way of earning good money. Most of the non-performing loans (NPLs) in the economy come from term lending. Let the function of term lending be taken over by investment banks. Corporate entities may also source long-term financing by issuing bonds. 

For equity financing, businesses should look to the equity market. For the starters in business, capital may come from venture capitalists or from the Bangladesh Bank's equity investment fund. Interest rate in the economy should go down further and we hope, the Bangladesh Bank's monetary policy will lend a support to it.

The writer is Professor of Economics University of Dhaka.


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